In a post I did some time ago, I showed that Ottawa (unlike Ontario) has been on the path to fiscal sustainability for some time now as a result of the fiscal crisis and subsequent restructuring of the 1990s. The recent concern with sustainability of federal finances is tied to the downturn in 2009 and the recession induced increase in spending coupled with the weakening of federal revenue growth as a result of GST cuts prior to 2009. It was a shorter-term fluctuation.
As for the concern that there is a fiscal imbalance in the Canadian Federation, that is also not a new development. Canada was born in a fiscal imbalance. Under the 1867 British North America Act, the federal government received the power to raise revenues by any means whatsoever whereas the provinces received only direct taxation. In other words, as the economy grew over time, federal revenues were predestined to be more income elastic than provincial revenues. As for the spending side, the provinces got health and education, which in the 19th century did not amount to very much but which were the growth poles of government spending in the twentieth century. As a result, the provinces were quickly faced with revenues not keeping pace with spending and clamored for more resources from the federal government, which they eventually obtained – tax point transfers and cash transfers. In this sense, Ottawa had always had the fiscal clout needed to enforce its will.
However, over the long term, the provinces have developed a revenue base on par with that of the federal government. They are no longer merely confined to direct taxation but can levy all of the taxes the federal government can with the exception of customs duties – which are no longer an important revenue source. In other words, the provinces have the tools to correct their own fiscal imbalance also but obviously they would prefer more transfers from the federal government than raising their own tax rates. However, given the differences in the level of economic development and tax bases across the federation, it should also be noted that not all provinces are equivalent in their room to manouver.
If Ottawa wants to use its fiscal clout to bring about change in the federation, where should it direct its energies? More transfer money in return for reducing interprovincial trade barriers? More transfers in return for for harmonizing sales taxes? How about the following: a complete redesign of the allocation of taxes bases across the tiers of the Canadian federation and the federal transfer system. The basic principle: the more mobile the tax base, the greater the case for allocating it at a higher tier of government in order to reduce distortions in resource allocation. Put all income tax revenue and a uniform income tax system entirely at the federal level and put all the revenues from a federally harmonized commodity taxation system entirely at the provincial level. Then redesign the federal transfer system to provide for whatever new fiscal gap ensues but in one per capita transfer designed either to equalize fiscal capacity or provide core funding for health and education.
Can something like this happen? Given the historical pace of Canadian consitutional change and the evolution of our current tax-transfer system, I suppose any federal government that proposes this is asking for trouble. This would be an exceptionally acrimonious can of worms given the recent change to health transfers that was simply imposed rather than discussed. Yet, rather than ad hoc changes that emerge out of short term haggling over tax points and transfers between Ottawa and the provinces, Ottawa can try and use its fiscal clout to fundamentally redesign the system of federal-provincial economic relations. After all, much like the Canadian tax system prior to the 1988 tax reforms, the current system of federal provincial fiscal relations has been the product of decades of improvisation. How to start? Is it time for a Royal Commission on the Canadian Fiscal Union?
If Ottawa wants to use its fiscal clout to bring about change in the federation, where should it direct its energies? More transfer money in return for reducing interprovincial trade barriers? More transfers in return for for harmonizing sales taxes? How about the following: a complete redesign of the allocation of taxes bases across the tiers of the Canadian federation and the federal transfer system.
The last bit is a rehash of the Rowell-Sirois Commission, which went nowhere. The Feds just persuaded the provinces to hand over EI in 1940 through an amendment to Section 91, and CPP/QPP was authorized by Section 94A. But experience shows it is very, very hard to get a province to give up its powers, they usually have to be bankrupt or uninterested in the field or both to sign on.
Or you could do what Australia did and hand payment for health care over to the Feds while provinces/states run the hospitals. Section 94A which makes the Feds "second payor" to the province where the citizen gets the benefit of both payments seems to be the logical place to start.
Historically, use of the Federal Spending Power to compel a province to do something is a recipe for acrimony and strife, and not just from Quebec.
Posted by: Determinant | September 28, 2013 at 05:16 PM
I can't speak to the tax policy side of this, but while federal payment for a provincially delivered healthcare service sounds interesting, my fear is that it would lead to rapid wage rises in currently low-paying jurisdictions (e.g., Atlantic, Quebec) thus cancelling any gains.
Posted by: Shangwen | September 29, 2013 at 04:27 PM
Shangwen: living in a low=paying jusrisdictions, maybe being able to pay competitive wages on a national market would help solve the manpower shortage ( and don,t start me on college teachers...)
Posted by: Jacques René Giguère | September 29, 2013 at 04:47 PM
"More transfer money in return for reducing interprovincial trade barriers?
Yes, this is what Coyne points suggests in his article. But where are these interprovincial trade barriers?
Posted by: Matthew | September 30, 2013 at 12:02 AM
Matthew:
On the one hand, examples that come immediately to my mind:1) different rules for trucking across provinces which can affect transporting goods cross country 2) different provincial licensing requirements for professionals: lawyers, doctors, nurses, trades people etc... 3) marketing boards 4) barriers to sale and or transport of alcohol across provinces. On the other hand, the Canadian Centre for Policy Alternatives has in the past said many of these barriers are a "myth". See: www.policyalternatives.ca/sites/default/files/uploads/publications/BC_Office_Pubs/bc_2007/bc_ab_tilma_btn.pdf.
Posted by: Livio Di Matteo | September 30, 2013 at 11:25 AM
Livio,
Other examples include public procurement and construction (which was a source of big spat between Ontario and Quebec a few years ago). There are also a host of local procurement requirements, local processing requirements, agricultural restrictions (i.e., Quebec's infamous ban on coloured margarine, amongst others). A lot of them are petty little things individually, but add up in aggregate).
Curiously, the CCPA concludes that, because inter-provincial trade is low, the cost of inter-provincial trade barriers is low. One might think that the fact that inter-provincial trade is low is, on its face, a sign that the costs of inter-provincial trade barriers are high. The more fundamental provlem with the CCPA's analysis is that it is founded on the myth that these sorts of agreements override democratic government. For that to be true, these agreement would have to have constitutional status - they don't. Governments who don't like the results of dispute panels against them can (and, as we see at the WTO, do) ignore them. And, of course, they can be overridden by a mere act of Parliament/Legislature.
Posted by: Bob Smith | September 30, 2013 at 12:51 PM
Most of the trade in manufactured goods is barrier-free and anyway, the country being split in two ( St-Lawrence basin and BC-AB)most of the trafic is within these two areas. Oil and gas flow unimpeded by provinces. The rest? Yep , Id like to buy more wine from ON and that this wine be paid by more ice cider. That trade is minuscule not because of trade barriers but because it would be minuscule in any case ( otherwise, there would be a srong lobby bfor it).
And some can't be legislated. A few years ago, I met a food manufacturer from QC. He had an english trade mark because market studies showed that a french name (for food!) polled badly. He even bought a small plant in ON so that customers could believe the things was from there. A couple of years later, he sold to a foreign entity who kept the same stategy. What federal budget position can cure that?
Posted by: Jacques René Giguère | September 30, 2013 at 02:39 PM
On the one hand, examples that come immediately to my mind:1) different rules for trucking across provinces which can affect transporting goods cross country 2) different provincial licensing requirements for professionals: lawyers, doctors, nurses, trades people etc... 3) marketing boards 4) barriers to sale and or transport of alcohol across provinces.
I'm indifferent to marketing boards (bad for a Dipper to say, but whatever). Except with respect to lawyers, I've never seen professional differences among provinces be a problem; mostly they are no more than an irritant or a curiosity. Quebec with its Civil Code is the only one that has a substantive difference which makes practising there for non-Quebec trained lawyers impossible (and quite right, too).
The Importation of Intoxicating Liquors Act is federal law designed to reinforce the status of provincial liquor boards; it exists at the request and behest of provinces. In Ottawa it's mostly a dead letter as nobody searches cars on the interprovincial bridges.
Lastly, interprovincial trucking is a federal jurisdiction, AIUI. Contracting for transportation between two points between two points in one province by a trucker from another would be rare, I believe.
Posted by: Determinant | September 30, 2013 at 04:15 PM
"That trade is minuscule not because of trade barriers but because it would be minuscule in any case ( otherwise, there would be a srong lobby bfor it)."
Isn't that a punchline to an old economist joke?
Economist #1: "Is that a twenty dollar bill on the floor?
Economist #2: "No, if it were, someone would have picked it up."
Consumers generally make lousy lobbyists. And many of the inter-provincial barriers to trade are designed (no doubt intentionally) to be opaque to all but their beneficiaries.
Posted by: Bob Smith | September 30, 2013 at 04:50 PM
Bob SMith: "consumers make lousy lobbyists". Yep. But producers6 If they see athwarted makets, they'll descend on any vaguely breathing, Mp, deputy minister, hapless staff and editorial writer unlucky enough to be within 100 miles.
Remember the raw milk cheese affair some 20 years back. Within hours of the regulation, QC cheesemakers ( at the time, it could plausibly be said that an Ottawa wine-and-cheese was Baby Duck with Velveeta, thankfully no more...) had assembled avery QC, Italian, Greek and other "ethnic" (aka people who knew and cared about food) MPs for a tasting in the House lobby. Case closed.
Remember the thing about salt in cheese curds? Too much salt and the cheese can't melt in poutine nor produce the satisfying "squishsquish" when you eat it fresh. 3 days and AgCanada( it was before the CFIA)folded faster than wet paper.
And I just remember when I was a young staffer at the National Assembly in Québec City. The phone call we had at the beginning of the craft beer era. I think the whole thing was legalized just to let us have some sleep.
Things are solved fast when there is a market.
Posted by: Jacques René Giguère | September 30, 2013 at 05:59 PM
Livio:
If we are talking about different regulatory requirements across provinces then perhaps "barriers" isn't the best term here. I can see how such things would be irritants or compliance burdens for businesses though. Yes, different licensing requirments for occupations exist across provinces, but changes made the Agreement on Internal Trade in 2009 have required provinces to basically mutually recognize each other's regulated workers. When mutual recognition occurs its probably unnecessary for requirments to be the same.
You're certainly right about the marketing boards and alcohol - though a few provinces appear to have followed through on the recent federal changes and allowed for direct importation of wine.
Bob Smith:
Yes, some provinces tend to limit access to public procurment and the construction thing between ON and Quebec seems like a mess. On the other hand, the western provinces have a regional agreement that has opened up procurement and construction. Also, a lot of infamous these agricultural barriers (i.e. the margarine) have been challenged and removed. You wouldn't even need an act of the parliament or legislature to override a trade agreement. A trde agreement is really just a political commitment couched in legal language. They aren't part of the domestic law of a jurisdiction.
Anyway, my impression is just that Mr. Coyne - who in other articles seems to feel provinces are almost always small minded to the detriment of the country - exaggerates the barriers somewhat. However, the CCPA is off base in calling them a "myth". If the barriers are a myth then why do they seems to hate trade agreements so much?
Posted by: Matthew | September 30, 2013 at 06:38 PM
Bob SMith: "consumers make lousy lobbyists". Yep. But producers6 If they see athwarted makets, they'll descend on any vaguely breathing, Mp, deputy minister, hapless staff and editorial writer unlucky enough to be within 100 miles.
Remember the raw milk cheese affair some 20 years back. Within hours of the regulation, QC cheesemakers ( at the time, it could plausibly be said that an Ottawa wine-and-cheese was Baby Duck with Velveeta, thankfully no more...) had assembled avery QC, Italian, Greek and other "ethnic" (aka people who knew and cared about food) MPs for a tasting in the House lobby. Case closed.
Remember the thing about salt in cheese curds? Too much salt and the cheese can't melt in poutine nor produce the satisfying "squishsquish" when you eat it fresh. 3 days and AgCanada( it was before the CFIA)folded faster than wet paper.
And I just remember when I was a young staffer at the National Assembly in Québec City. The phone call we had at the beginning of the craft beer era. I think the whole thing was legalized just to let us have some sleep.
Things are solved fast when there is a market.
Posted by: Jacques René Giguère | September 30, 2013 at 07:17 PM
PEI has raised the amount of wine I can bring into the province to a case per adult, but I have to bring it in myself, I'm not supposed to have it shipped in. While it's true they don't tend to search cars on the bridge, they obviously do searching under some premise as they occasionally apprehend cigarette smugglers. I wonder what would happen if they found me with a few extra cases of wine?
A number of wineries have stated their willingness regardless to ship into PEI, and my understanding is the shipping companies and Canada Post don't really care. Some wineries, however, still refuse, lessening my choice.
Posted by: Jim Sentance | September 30, 2013 at 08:45 PM
Hello Jacques:
I cannot find your comment in spam but I took it out of my email and will post it here:
Jacques-Rene-Giguere
“Bob Smith: "consumers make lousy lobbyists".
Yep. But producers? If they see a thwarted markets, they'll descend on any vaguely breathing, MP, deputy minister, hapless staff and editorial writer unlucky enough to be within 100 miles.
Remember the raw milk cheese affair some 20 years back? Within hours of the regulation, QC cheese makers ( at the time, it could plausibly be said that an Ottawa wine-and-cheese was Baby Duck with Velveeta, thankfully no more...) had assembled every QC, Italian, Greek and other "ethnic" (aka people who knew and cared about food) MPs for a tasting in the House lobby. Case closed.
Remember the thing about salt in cheese curds? Too much salt and the cheese can't melt in poutine nor produce the satisfying "squishsquish" when you eat it fresh. 3 days and AgCanada( it was before the CFIA) folded faster than wet paper.
And I just remember when I was a young staffer at the National Assembly in Québec City. The phone calls we had at the beginning of the craft beer era. I think the whole thing was legalized just to let us have some sleep.
Things are solved fast when there is a market.
Posted by: Livio Di Matteo | October 01, 2013 at 11:00 AM
"Yep. But producers? If they see a thwarted markets, they'll descend on any vaguely breathing, MP, deputy minister, hapless staff and editorial writer unlucky enough to be within 100 miles."
Well, that depends on the producers, doesn't it. Who has more clout with Quebec's politicians over public procurement issues, Quebec contractors (and their unions) or their Ontario counterparts? Who has more pull over Ontario beer legislation - BC or Alberta based craft-brewers, or the big two incumbents and the local craft-brewer whose facility hosted the premier's nomination party (hypothetically). We know the voice of foreign agricultural producers (and consumers) carries exactly no weight with the federal government on agriculture issues, even though changing those laws would benefit both Canadian consumer and other Canadian industries (who might gain better access to foreign markets if we were willing to sacrifice managed agriculture.
"Things are solved fast when there is a market."
I'm as free market as the next guy, but that just isn't true. See, for example, the annual tales of hoarding of canned cream in Newfoundland, which can't be imported in anywhere near the amounts needed to satisfy demand due to our dairy restrictions (http://news.nationalpost.com/2013/09/19/newfoundland-reeling-over-tinned-cream-shortage-that-retailers-blame-on-strict-dairy-supply-management-laws/). That answer almost perfectly embodies the "it isn't $20" parody of economists.
Posted by: Bob Smith | October 01, 2013 at 12:56 PM
Interprovincial trucking is a bit of a weird area. Technically it is under federal jurisdiction(thus truck drivers work under the Canadian Labour Code) however, for the past 40 or 50 years in practice most of its regulation has been undertaken by the provinces. This is largely due to the fact that the provinces are almost exclusively responsible for road maintenance, vehicle licensing, and policing in the case of Ontario and Quebec. The only exceptions to this are the TCH through Banff and the other Western Parks(maintained by Parks Canada) and the National Capitol Commission that provides a 50 percent match for freeway construction and maintenance within a certain radius of Ottawa. Other than that with some rare exceptions(Champlain bridge??) the provinces are mostly on their own.
Both the US and Canada are probably going to have to consider road tolling on much greater scale in the future than in the past(Technically the US prohibits tolls on federal financed interstate highways). With modern technology such as what is on the Ontario 407 it is no longer the hindrance that it was 30 or 40 years ago(Remember too road tolling on the 407 was introduced by the Rae NDP government). In Canada it is less of hot potato as Canada has fewer miles of limited access highway and Ottawa on historical and legal grounds can wash its hands of the issue unlike the US federal government. The biggest problem with road tolling is in provinces who in living memory like BC and Quebec eliminated tolling when budget were flush to curry political favor.
On the surface while Canadian transport infrastructure seems much more expensive and inferior to that of the US it is built on much more solid financial grounds(see Nav Canada vs FAA Air Traffic Control) due to Mulroney and Chretien era reforms.
Sorry for going off track towards the end.
Posted by: Tim | October 01, 2013 at 01:43 PM
Bob Smith: when our main trade barriers are about canned cream, we're into first-world problems...
Posted by: Jacques René Giguère | October 01, 2013 at 05:49 PM
That canned cream in the National Post story just looks revolting, but a pretty good example of a silly trade barrier.
"Who has more clout with Quebec's politicians over public procurement issues, Quebec contractors (and their unions) or their Ontario counterparts?"
Sure, but I wonder why Quebec contractors wouldn't want a bigger piece of public procurement in other provinces. You would think that at least some would have ambitions outside of the province.
Posted by: Matthew | October 01, 2013 at 07:31 PM
Matthew: they sense that the construction business would tutn out to be like the frozen vegetables markets ( see above). It may be wrong, but that's what they may fear.
Posted by: Jacques René Giguère | October 02, 2013 at 11:37 AM